1922 Encyclopædia Britannica/Dollar Securities Mobilization

DOLLAR SECURITIES MOBILIZATION. In the British system of war finance, 1915-7, an important part was played by the mobilization of securities. During the World War enormous supplies of war materials of all descriptions had to be purchased by England from abroad, and in addition, owing to the withdrawal of labour from production in the Allied countries, abnormal quantities of goods had to be obtained from the same sources.

The exchange facilities available were entirely inadequate for the purpose of making the payments necessitated by these purchases, and artificial methods had to be adopted to provide in suitable foreign currencies the funds required. The natural procedure was by borrowing, and by the realization of such assets as were marketable in the creditor countries.

Though in some instances, and more particularly in the early days of the war, it was possible to effect loans abroad on the credit of the borrowing countries, it was found necessary to a large extent to provide collateral security in addition. The various securities quoted on the Stock Exchange and others of similar nature held in the Allied countries formed the natural and most fruitful field for obtaining suitable collateral and for providing the assets most readily marketable abroad.

Before the introduction of any official control a considerable amount of securities of the United States of America and other foreign countries was sold abroad, on account of the relatively high prices obtaining and the favourable terms on which the proceeds could be remitted home, owing to the fall in exchange rates which had already taken place. Even after the introduction of official action these natural sales continued, though necessarily in decreased volume. The funds provided by means of these sales and from loans effected abroad without collateral security supplied in the main the necessary sums to pay for the purchases made, but as the demand for goods and raw material became more insistent the British Treasury found it necessary to take official action. In July 1915 instructions were given to the Bank of England to purchase American dollar securities by private treaty or through the London Stock Exchange and forward them to New York for sale. By this means securities of the nominal value of $233,000,000 were obtained before the end of the year and the pressing requirements of the Treasury were satisfied.

By Dec. 1915, however, it had become apparent that this somewhat haphazard method of purchasing available securities was not altogether satisfactory nor likely to achieve the desired results, and it was therefore decided to adopt a more comprehensive scheme. Accordingly, the Treasury appointed a committee, known as the American Dollar Securities Committee, with a permanent secretary of the Treasury as chairman, the deputy governor of the Bank of England as deputy chairman, and four members, two of whom were nominated by the Bankers' Clearing House and two by the Committee of the London Stock Exchange. The management was placed in the hands of Mr. (afterwards Sir) George May, the secretary of the Prudential Assurance Company.

In order to obtain some idea as to the volume and class of securities available a circular letter was sent to all the larger investors, such as insurance companies, banks and trust companies, asking them to submit lists of American dollar securities held by them, with a view to a possible sale or loan to the Treasury. Active operations were begun in Jan. 1916, at the National Debt Office in Old Jewry, by the issue of a list of 54 selected American dollar bonds which the Treasury was prepared to purchase. The prices offered were based on the current New York closing quotations of the previous evening, the New York percentage price being converted into the London sterling price at the existing rate of exchange with accrued interest.

The scheme was successful from the outset, as will be seen from the fact that securities to the value of over £40,000,000 sterling were obtained in the first ten weeks of its operation.

During the first months of the Committee's existence no securities had been taken on loan, but towards the end of March 1916 a deposit scheme, subsequently known as scheme A, was introduced. Briefly the scheme was as follows:—

UNITED KINGDOM3-5 year 5½% Notes Dated Nov. 1 1916.

Up to May 27 1916, rather less than five months after the formation of the Committee, the amount paid for securities purchased exceeded £51,000,000 sterling, while the nominal amount of securities deposited on loan was about £8,000,000. Since these figures, however, were not sufficient to provide the funds required, the Chancellor of the Exchequer stated in Parliament that powers would be taken to impose a special tax of 2s. in the £1 on the income of all securities that the Treasury, by means of special lists, declared its willingness to purchase. The necessary authority of Parliament was granted. Relief from the additional tax was only obtainable by selling or loaning the specified securities to the Treasury. The effect was immediate. In the first two weeks following the announcement the purchases exceeded £23,000,000 sterling and the deposits £15,000,000 sterling. In course of time the purchases greatly decreased but the deposits, mainly owing to the introduction of scheme B, assumed very large proportions. For example, during the month of Sept. 1916, the securities taken in on loan amounted to about £100,000,000. The enormous requirements of the Treasury are

emphasized by the fact that in spite of the large amounts of securities purchased and deposited a still more drastic step had to be taken.

On Jan. 24 1917, a regulation issued under the Defence of the Realm Act came into force, by which the Treasury was given power to requisition securities. The first order under this regulation was issued on Feb. 17 1917, and required owners or custodians of specified securities to deliver them up in return for an amount of compensation based on the current market values. Holders of securities not ordinarily resident in the United Kingdom and certain other holders were exempted from the terms of the order. The compensation was payable within seven days of the transfer, and power was given to reduce its amount in case of late delivery. Altogether four such orders were issued, the number of securities included being 1,076. On March 1 1918 deposit scheme B was closed to new deposits, except in regard to securities subject to the extra 2s. tax and which had not previously been included in the list of requisitioned securities. A little later, when the securities under scheme A began to fall due for return, depositors were given the option to extend the term to five years. Nearly all such depositors availed themselves of this offer.

The labour involved in connexion with the operations and more particularly with the loan scheme, was of considerable magnitude, and it was necessary to adopt every device in order to lessen the work, which in the main had to be carried out by a staff collected in a time of emergency. In the early days an agreement was entered into with the agents of over £100,000,000 bearer securities, the coupons of which had to be encashed in London, to pay the coupons on deposited securities, plus the additional ½% per annum, and for this purpose they were supplied with schedules giving such information as would permit of the calculations and payments being made. In Sept. 1917 this procedure was discontinued, and thereafter the work was taken over by the National Debt Office.

With regard to the registered stocks on deposit, much duplication of work was avoided by the railway companies and other paying agents undertaking to keep the Treasury register and pay the increased interest as it fell due. By this means it is estimated that the authorities were relieved from the preparation, etc., of about 350,000 dividend warrants each year. Further, certain approved agents were appointed to accept deposits of amounts of less than $5,000 each, the securities being handed over in bulk to the Committee; payment of interest on the aggregate amounts was made to such agents, who in turn distributed the sums received amongst the individual depositors.

The United States of America was naturally the chief source of supply, both for munitions of war and for goods, and therefore the financial arrangements already referred to were mainly directed to the provision of dollars in order to effect the necessary payments. In a smaller degree, however, payments had to be made to other countries, and certain of the securities obtained by the Committee were used to meet these obligations.

(G. E. M.)